Employee Benefit Programs

{4 minutes to read}  Many times the first level of employee benefit programs for business owners is to establish a pension or 401(k) plan. Many times, however, business owners want to do something additional for, let’s say a key employee. There are areas of benefits that allow people who own businesses to provide a benefit to one executive, but not necessarily provide to another or for that matter to anyone else.

As a business owner, if I had a key person for whom I wanted to do something special, I could establish a non-qualified benefit program. There are two types of these benefit programs:

Deferred Compensation Plans:  

These types of plans promise to pay out a certain benefit at a future date. However, in those situations, the cost of the plan or the funding or savings — so that we have the money to pay out those benefits — is not deductible because they retain ownership of those assets in the company. Business owners don’t necessarily like the idea of saving for someone’s retirement or providing these benefits if they don’t get a tax deduction. Plus, the employee is somewhat handcuffed to the business, because if they leave, they wouldn’t get those deferred dollars.

Bonus Plans: 

As an alternative to a deferred compensation plan, business owners can set up bonus plans. With bonus plans, the business owner gets a deduction and the employee is not required to stay with the firm. If the owner gives the employee a bonus, and then they get a better offer from a competitor, they could decide to leave, taking their bonus with them.

There is a concept where we combine these two programs. It’s called a Leverage Bonus Plan. In this plan, the bonus is paid to the executive but once that bonus is paid, it triggers income tax which the executive would have to pay out-of-pocket. Rather than doing that, we would set up an advance or loan program to pay the tax.

For example, if we gave a $50,000 bonus and the executive was in a 30% tax bracket, that would be a $15,000 tax liability. Rather than it coming out of pocket, the business owner loans the money to the executive and takes a collateral assignment on the pool of money in the investment or insurance vehicle that the bonus went to, which gives the company the ability to get back its bonus money if the employee leaves.

After three years of making an additional loan to pay the $15,000 tax, they would be in the assignment on the account of $45,000. So if the executive wanted to leave the company, they would lose that $45,000 or have to pay it back. This allows that business owner to do three things: 1) reward a key executive; 2) get a deduction for that executive; and 3) create an incentive for the executive to remain with the company.

These types of plans can be customized for your business so that the business owner can be in a position where they have the deduction, the retention, and the control that they need in order to implement the plans.

Registered Representative offering Securities through American Portfolios Financial Services, Inc. (APFS) Member FINRA/SIPC. Investment Advisory Services are offered through G&G Planning Concepts, Inc. which is not affiliated with APFS.  Strategic Wealth Advisors Network and Gassman Financial Group are not affiliated with APFS.

Any opinions expressed in this forum are not the opinion or view of American Portfolios Financial Services, Inc. (APFS) or American Portfolios Advisors, Inc.(APA) and have not been reviewed by the firm for completeness or accuracy. These opinions are subject to change at any time without notice. Any comments or postings are provided for informational purposes only and do not constitute an offer or a recommendation to buy or sell securities or other financial instruments. Readers should conduct their own review and exercise judgment prior to investing. Investments are not guaranteed, involve risk and may result in a loss of principal. Past performance does not guarantee future results. Investments are not suitable for all types of investors.

This material is for informational purposes only. Neither APFS nor its Representatives provide tax, legal or accounting advice. Please consult your own tax, legal or accounting professional before making any decisions.American Portfolios Financial Services, Inc.(APFS) and American Portfolios Advisors, Inc.(APA) are not affiliated with any other named business entities mentioned.